Insights

An increased spotlight on the mortgage industry over the past few years has brought to light the challenges lenders face in adhering to state mortgage laws. Mortgage recording requirements in particular vary greatly from state to state. Adding to the idiosyncrasy of state mortgage recording requirements is the prominent role of county clerks and customary practices in the recording process. A recent amendment to the Kentucky mortgage recording statute reflects an attempt by legislators to adapt statutory law to how the mortgage recording process works in practice.

Kentucky Senate Bill 148 adds a new subsection (2) to KRS § 382.290. The new law requires, as a condition to recording a mortgage, that the mortgage contain the following information:

No county clerk or deputy county clerk shall admit to record any mortgage or deed in which liens are retained unless the mortgage or deed in which a lien is retained plainly specifies and refers to the next immediate source from which the mortgagor or grantor derived title to the property or the interest encumbered therein.

There is no legislative or regulatory history to explain or illustrate in any greater detail the type of information required by new subsection (2). However KRS § 382.110(2) (which sets out the recording requirements for a deed of conveyance) contains a similar requirement:

No county clerk or deputy county clerk shall admit to record any deed of conveyance of any interest in real property equal to or greater than a life estate, unless the deed plainly specifies and refers to the next immediate source from which the grantor derived title to the property or the interest conveyed therein.

KRS § 382.110(4) further provides:

If the source of title is a deed or other recorded writing, the deed offered for record shall refer to the former deed or writing, and give the office, book and page where recorded, and the date thereof. If the property or interest therein is obtained by inheritance or in any other way than by recorded instrument of writing, the deed offered for record shall state clearly and accurately how and from whom the title thereto was obtained by the grantor.

Based on the similarities of the language in the new subsection (2) to KRS § 382.290 and in KRS § 382.110(2), it would be reasonable to conclude that the "next immediate source" information that must be added to a mortgage under the new KRS § 382.290(2) will be similar to the information required to be contained in a deed of conveyance under KRS § 382.110(2) and (4).

Looking at the property descriptions in both deeds of conveyances and mortgages in Kentucky, lenders are already providing the "next immediate source" information required to be contained in a deed of conveyance under KRS § 382.110(2) and (4), in the property descriptions in mortgages. Based on our conversations with clerks in various counties in Kentucky, recorders typically expect a mortgage presented for recording to include the same Next Immediate Source information currently required for a deed of conveyance and will often recommend that it be included if it is not already. The new subsection (2) to KRS § 382.290 effectively codifies what has already developed into a customary practice in Kentucky.

The customary practice, and soon to be statutory requirement, to include recording information about the deed of conveyance in the property description section of a mortgage would theoretically create a "Catch-22" document completion problem for purchase money transactions, where the loan to fund the purchase price for the conveyance of the property by the seller to the buyer is contingent on the mortgage being recorded. However, this issue does not arise in Kentucky due to another idiosyncratic customary practice that differs from how the mortgage execution and recording process works in a number of other states.

County clerks that we spoke to revealed, and local counsel in Kentucky confirmed, that the customary practice in Kentucky is for the lender to draft a mortgage securing a purchase money transaction with blank spaces in the property description representing where the Next Immediate Source information should be provided. The parties will, typically, execute the mortgage without the Next Immediate Source information. When the deed of conveyance and mortgage are presented for recording, the county clerk will first record the deed of conveyance and then handwrite the Next Immediate Source information in the blank spaces provided for that purpose in the mortgage. The county clerk will then record the mortgage.

Keeping up with the intricacies of the recording process can be quite a challenge. Codification of customary practices is definitely a step in the right direction. However there remain enough moving parts that knowledgeable counsel is crucial for compliance.

Latif Zaman is an associate in the Maryland office of Hudson Cook, LLP. He can be reached at 410-782-2346 or by email at lzaman@hudco.com.